After the major setback faced by Prime Minister Theresa May with the loss of her majority in the United Kingdom parliament in June 2017, the outlook on Brexit negotiations has never been so uncertain. As the negotiation deadline with the EU approaches dramatically, a blurry political situation was the last thing the U.K government needed. But yet, it is. As this political turmoil unfolds, uncertainty grows and the economy already suffers from it.
1. Expectations following the referendum
In our previous entries following the vote in June 2016, we have endeavoured to provide a clear perspective on both long term and short term expectations on British economy.
On a longer time frame, we have presented the various scenarios that the U.K would face depending on their willingness to go down the path of a “hard” or a “soft” Brexit. If both choices would hurt the British economy and the old continent, “hard” Brexit and a complete isolation of the country would have disastrous effect, with up to 3% loss in GDP growth for the U.K and almost as much for some EU countries heavily trading with the UK (Ireland, Netherlands, Belgium).
Since the UK has not yet left the EU, any economic effect that can presently be observed is rooted in people’s anticipation of the actual effects and their preparations for the eventual exit from the EU. Over a shorter period, the driver of economic instability is the lack of long term certainty that the economic actors have – from the consumers to the bankers. Uncertainty discourages investment both from foreign and domestic investors which have a direct effect on jobs, salaries, consumption and ultimately on GDP.
Over a year after the Brexit vote, it seems therefore legitimate to ask how the British economy reacted so far to this rise of uncertainty following the referendum and how bright the future for the British economy still is.
2. Present economic and confidence trends
Exchange rate and inflation
Since the UK voted to leave the EU, the exchange rate of the pound has seen its figure decreasing considerably and reaching historical lows in August 2017. This fall of the Sterling exchange rate was accompanied by a rise of inflation up to 2.9% in both June 2017 and August 2017. A decrease of inflation is not expected in a near future and consequently, as wage increases are not keeping the pace, real wages are falling.
Consumption and Consumers Confidence
As we noted previously, the recent increase in inflation being comparatively higher than the wage growth led to a decrease in real wages. British households are seeing their purchasing power diminish. As a matter of fact, car sales strikingly fell by 9.3% in July 2017 and the SMMT (Society of Motor Manufacturers and Traders) forecasts a 2.6% backlash in sales in 2017. The fall of the growth rate of house prices is another witness of a slowdown of the british economy. From 8.2% in June 2016, the growth figure fell to 4.9% in June 2017.
In this climate of uncertainty supported by the loss of majority of Theresa May at the general election, we can see that the consumer confidence, that stabilised around -6 after a record low in June 2016, has tumbled again to -10 in June and -12 in July 2017. This lower consumer confidence explains why British citizens seem to be more cautious about big and typically credit-financed purchases, such as cars or houses.
Trade and Investment Figures
After the referendum, the trade sector was, at first, forecast to see its trade activities undergo a downfall in response to the uncertainty climate.
However, the depreciation of the pound following the vote was expected to counterbalance this downfall and support the exports and the growth of FDI in the U.K in the other direction. However, it was barely the case since, according to the latest report, total exports increased only by £0.9 billion in the 3 months to July 2017 but decreased by £0.1 billion between June and July 2017.
Meanwhile, if the rise of import prices has affected the production prices and the general level of consumer prices. Total imports, for their part, have not declined but rather unexpectedly increased by £1.3 billion in the last 3 months to July 2017.
Besides the difficulty of the economy to take advantage of the low pound to significantly increase its exports, the increased demand of expensive imported goods enhanced the trade deficit rather than reducing it.
Migration declining dangerously
Migration and border control were already among the main arguments of the pro-Brexit leaders to support the need of the U.K. to leave the EU, it might become soon an even bigger issues. Migration is indeed deeply interconnected with trade and particularly in the U.K. where almost 7% of the country’s workforce are immigrants and up to 20% in specific manufacturing and service sectors.
The immigration trend post-Brexit vote is striking. The net migration figures have gone down from +327,000 in March 2016 to +246,000 in March 2017. The months following the referendum was followed by a net decrease in immigration and an increase in emigration. This changing migration trend concerns particularly EU citizens, who do not know what the future holds for them, rather than non-EU migrants. Between March 2016 and 2017, as the EU immigration fell from 267 000 to 248 000, the EU emigration went up from 89 000 to 122 000.
Dwindling number of University applications
The same dynamic has been observed with the application numbers for the British universities. The amount of applications has strikingly diminished by 5% in 2017 relatively to the year before and for the first time since the increase of registration fees in 2012. This trend has been significantly higher for the application originating from EU countries and Wales.
This decline materializes the uncertainty of European students to obtain a visa to stay and work in the UK in the near future. Further causes must however be taken into account since registration fees will be raised to £9,250 in 2017 and students loans will see their interest rates increase from 4.6% to 6.1% at the beginning of this new academic year.
Growth and perspectives
Finally, the GDP growth is also slowing down as it was reaching 0.3% in the last quarter. The poor export results despite the low pound and tightening of household budget does not suggest any short-term improvement. All the indicators are with the reds and the forecasts would take an even darker turn if the British government would choose the hard path for Brexit.
If the trade figures do not show strong recession patterns so far, the crawling inflation reduces dangerously the real wages and purchasing power of the British citizens. Simultaneously, the fall of the pound exchange rate rises the price of imports and hardly contributes to an export increase. Finally, the strongest and most visible post-referendum tendency is the decrease in EU migration and university applications driven by the uncertainty of the post-Brexit status of EU citizens. If the UK government does not rapidly stand against this uncertain state of affairs, it could be a dangerous and slippery slope for British economy heavily relying on its international and particularly European workforce.
Thus, the next steps in the Brexit negotiations will be crucial as the “no-deal” casts a shadow of uncertainty and legal limbo on the British economy.